The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Ahmedabad, has delivered an important ruling on the eligibility of CENVAT credit on input services used in setting up a manufacturing plant after the expression “setting up” was omitted from the inclusive portion of the definition of “input service” under Rule 2(l) of the CENVAT Credit Rules, 2004.
The bench of Dr. Ajaya Krishna Vishvesha (Judicial Member) and Satendra Vikram Singh (Technical Member) has observed that the mere deletion of the words “setting up” from the inclusive part of Rule 2(l) does not, by itself, render such services ineligible for CENVAT credit. The decisive question is whether the services fall within the main part of the definition—namely, whether they were used directly or indirectly, in or in relation to the manufacture of final products—and whether they are specifically covered by any exclusion clause.
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The bench remanded the matter to the adjudicating authority for a service-wise examination of the documentary evidence to determine whether individual services were actually hit by the exclusion clauses under Rule 2(l). Both appeals were therefore partially allowed by way of remand.
The appellant/assessee was located at Dahej Industrial Estate in Bharuch, Gujarat, is engaged in the manufacture of excisable goods falling under Chapter 40 of the Central Excise Tariff Act, 1985.
The dispute arose from an audit of the company’s financial records for the period July 2013 to December 2015. The department noticed that the assessee had availed service tax credit on several categories of services, including engineering contracts, procurement assistance, erection and commissioning, installation, laying of foundations and structures, professional and management consultancy, Vastu and architectural services connected with the establishment of buildings and a new plant.
According to the Revenue, the definition of “input service” under Rule 2(l) had undergone a significant amendment with effect from April 1, 2011, pursuant to which the expression “setting up” was removed. The department consequently took the view that services used for setting up the factory could no longer qualify for CENVAT credit.
Two proceedings followed. The first show cause notice dated June 16, 2017 covered the period from July 2013 to December 2015 and proposed disallowance of CENVAT credit amounting to ₹57.80 lakh. A second statement of demand dated April 2, 2018 covered March 2016 to June 2017 and involved credit of ₹20.36 lakh. Thus, the total disputed credit amounted to approximately ₹78.18 lakh.
The adjudicating authorities confirmed the credit demands along with interest and imposed penalties. The Commissioner (Appeals) subsequently upheld the demands and interest, while reducing the penalties to different percentages of the credit amount.
The central question before the Tribunal was whether input services used for setting up the Dahej manufacturing facility became ineligible merely because the words “setting up” were removed from the inclusive portion of Rule 2(l) with effect from April 1, 2011.
The assessee argued that the amendment could not be interpreted as creating an absolute prohibition. According to the appellant, the definition continued to contain a broad main clause covering services used by a manufacturer, directly or indirectly, “in or in relation to” the manufacture of final products.
The appellant also argued that several of the disputed services—particularly fabrication, erection, installation and commissioning services—were intrinsically connected with manufacturing operations and therefore fell within the main part of the definition.
The company contended that commercial production at the Dahej unit commenced on March 12, 2015, and that several of the disputed services were actually connected with expansion and maximisation of production capacity rather than merely the initial “setting up” of the factory. It relied upon work orders, invoices, ER-2 returns and correspondence with the Development Commissioner to support its position.
The assessee further submitted that the disputed fabrication and erection activities included erection and commissioning of a fuel handling system, fabrication and commissioning of stainless-steel tanks, steel structures, armoured electrical cables, boilers, chimneys and pipelines.
According to the appellant, these activities had a direct nexus with manufacturing and therefore qualified under the principal limb of Rule 2(l).
The company relied on several judicial precedents, including decisions concerning processes integrally connected with manufacture and decisions holding that construction, erection, commissioning and other services could qualify where they had a sufficient nexus with manufacturing activity.
A significant aspect of the Tribunal’s reasoning was its reliance upon earlier decisions dealing with the same post-2011 amendment.
The assessee relied particularly on the CESTAT Hyderabad decision in Pepsico India Holdings Pvt. Ltd., where the Tribunal had examined the effect of deleting “setting up” from the inclusive part of Rule 2(l).
The Pepsico ruling distinguished between the three components of the amended definition: the main clause, the inclusive clause and the exclusion clause. It reasoned that although “setting up” was no longer specifically mentioned in the inclusive portion, services used in setting up a factory could still qualify under the main clause if they were used directly or indirectly in or in relation to manufacture and were not specifically excluded.
The Tribunal in the present case reproduced the reasoning that setting up a factory may not itself constitute manufacture, but is directly connected with manufacturing activity because manufacturing cannot commence without the manufacturing facility. Accordingly, the omission of the phrase from the inclusive portion does not automatically eliminate eligibility under the principal clause.
The assessee also relied upon the CESTAT Bangalore decision concerning Shell India Pvt. Ltd., where similar credit had been allowed despite the deletion of the phrase “setting up” from the definition.
The department defended the denial of credit by pointing to the nature of the services involved, which included fabrication, manpower, erection, commissioning, architectural and Vastu services.
According to the department, these services were not admissible after the amendment to Rule 2(l) because they were used for setting up the plant. The Revenue also relied upon an earlier Tribunal decision in Grindwell Norton Ltd. to support its interpretation.
The Revenue therefore sought to sustain the denial of credit as well as the invocation of the extended period.
The Ahmedabad Bench observed that the legal issue was no longer res integra in view of several subsequent judicial decisions.
The Tribunal noted that CESTAT Hyderabad in Pepsico India had already held that the amended definition continued to have a broad main clause. Under that clause, services used directly or indirectly in or in relation to manufacturing could qualify even if the expression “setting up” had been removed from the inclusive portion.
The Bench also considered the decision involving Shell India, where the Tribunal similarly concluded that deletion of the expression “setting up” from the inclusive portion did not automatically result in denial of credit where the services otherwise satisfied the main definition.
The Ahmedabad Bench took note that the Shell India decision had been upheld by the Karnataka High Court.
The High Court had examined a wide range of services, including consulting engineer services, management consultancy, manpower recruitment, real estate consultancy, business support services, erection, commissioning and installation, technical testing, architectural services, maintenance, security, warehousing, customs agency and chartered accountant services.
The Karnataka High Court answered the question of law in favour of the assessee, and the Tribunal noted that the Revenue’s further appeal was subsequently dismissed by the Supreme Court. The Tribunal observed that the issue had consequently attained finality.
The Bench also referred to a 2025 CESTAT Chennai ruling in Nemak Aluminium Casting (I) Pvt. Ltd., which followed the same legal approach and held that the primary eligibility test remained the “means” or main clause of the definition.
The Tribunal ultimately crystallised the legal position by observing that Rule 2(l) covers services used by a manufacturer directly or indirectly in or in relation to the manufacture of final products.
Consequently, the omission of “setting up” from the inclusive portion does not by itself defeat a credit claim.
The crucial question is whether the particular service is covered by the exclusion portion of the definition. The Tribunal specifically referred to exclusion clauses (A), (B), (BA) and (C), holding that services falling within those exclusions would not be eligible for CENVAT credit.
This distinction is significant because it prevents a blanket approach under which every service connected with establishing or expanding a factory would automatically be denied credit merely because “setting up” was deleted from the inclusive clause.
Despite accepting the assessee’s broader legal proposition, the Tribunal found a factual evidentiary gap.
The adjudicating authority had recorded that the assessee had not submitted sufficient evidence to establish that the disputed services were not used for construction of civil structures, laying foundations or making structures supporting capital goods.
The Ahmedabad Bench therefore considered it necessary to examine each disputed service individually, rather than allowing the entire credit merely on the basis of the general legal principle.
The matter was consequently remanded to the adjudicating authority for a limited purpose: to re-examine each service in light of the documentary evidence produced by ATC Tires and determine whether the service fell within any exclusion under Rule 2(l).
The Tribunal directed ATC Tires to produce the required documents before the adjudicating authority within four weeks.
The adjudicating authority has been directed to decide the matter in accordance with the principles of natural justice within a further period of four months.
Thus, the Tribunal has not finally allowed the entire ₹78.18 lakh credit. Instead, it has established the legal framework under which the eligibility of each service must now be determined.
The assessee had also challenged the invocation of the extended period of limitation, arguing that the first notice arose from an audit of statutory records maintained by the company and that there was no suppression or misstatement.
The appellant argued that where the dispute is essentially one of interpretation of the CENVAT provisions and the department has derived the information from the assessee’s statutory records, invocation of the extended limitation period was not justified.
The Tribunal’s final order, however, focused on determining the eligibility of the disputed services and remanding the matter for service-wise verification.
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